Banks such as National Bank of Abu Dhabi (NBAD) could buy the dirham-denominated government debt to help meet liquidity requirements

Reuters/Dubai

The United Arab Emirates is expected to issue its first ever federal government bonds before 2018 to help the country’s banks meet global liquidity rules, but feasibility studies are yet to be completed, a senior finance ministry official said.

UAE banks, such as National Bank of Abu Dhabi and Emirates NBD, could buy the dirham-denominated government debt to help meet liquidity requirements being phased in under the Basel III global banking standards.

“The purpose of issuing bonds is to meet the requirements of Basel III, since the central bank needs to accommodate Basel’s requests that the country’s banks maintain certain portions of sovereign bonds, in which case the unavailability of bonds will make the requirement difficult to fulfil,” Younis al-Khouri, undersecretary at the federal Ministry of Finance, said.  A long-awaited public debt law, which would be required for any future issuance of federal sovereign bonds, has been stuck in the government consultative process for the past five years.

The slow progress has led to repeated calls by the central bank to the government to expedite the law so that domestic lenders can meet the forthcoming Basel III liquidity rules, describing it as “a national priority”.

Khouri said the ministry was working with the central bank to establish the level of future issuance that would be sustainable for the state.

“It is difficult to determine the date of government bond issuance as studies have not been finalised,” Khouri said, according to the ministry’s website. (www.mof.gov.ae)

“It is expected to take place before 2018, because the Basel panel set 2018 as the year to begin implementing the Basel III standards, but there is no comprehensive and final agreement regarding this issue yet,” he added.

The law would also allow the central bank to issue short-term Treasury bills on behalf of the government to better manage liquidity in the banking system.

Longer-term bonds could help finance federal government development projects. It now gets most of its funding from the oil-producing emirate of Abu Dhabi.

“The federal government is in no need to immediately issue bonds, given that its budget is always balanced and in several years even achieves a budget surplus,” Khouri said.

Some of the seven emirates in the UAE, such as Abu Dhabi and Dubai, have issued debt in the past, but the 2009-2010 Dubai debt crisis dented appetite for federal bond issues in the Gulf Arab country and oil exporter.

Initially, the ministry planned to merge the federal public debt law draft with those of the individual emirates but abandoned the plan after a deep scrutiny, Khouri said. He did not indicate when the bill could be approved.

The federal government planned to spend 46bn dirhams ($12.5bn) in 2014, which is as little as around 14% of overall fiscal spending in the UAE, while the individual emirates account for the rest.